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“Economic Growth and the Swedish Model” Magnus Henrekson, Lars Jonung, Joakim Stymne

A scientific explanation of the decline of the so admired Swedish Model, the Social Democratic Welfare state with high taxes and a ever increasing public sector that relies on Keynesian stimulus that leads to a viscous circle of high government debt that has to be managed by using high inflation as well as continuous devaluations of the currency to keep of international competitiveness.

What begs the question is why president Obama wants to emulate a failed model?

 

“Economic Growth and the Swedish Model”

 

Magnus Henrekson, Lars Jonung, Joakim Stymne 2004

 

Introduction

 

Abstract: We examine the growth performance of Sweden in the

post-World War II period, focusing on explaining the relative

decline of economic growth in Sweden since the early 1970s. The

hypothesis that the relative decline is a consequence of productivity

catch-up is rejected. A number of potential ”ultimate” causes behind

the slowdown are explored. An increasingly inefficient process of

capital formation; a shrinking share of the economy being exposed

to international competition; long-run negative effects of activist

stabilisation policies; rapid growth of the public sector;

deteriorating incentives for human capital formation; and weak

incentives for implementing the results of R&D efforts are all part

of the story. The evidence suggests that the incentive structure

created by ”the Swedish model” made Sweden less successful in

adapting to the shocks of the 1970s and 1980s than other OECD

countries.

The efffects of functional socialism, comparing Sweden and Switzerland

If one wants to measure the impact of functional socialism,  social democracy, you should compare Switzerland with Sweden. The so called Swedish model is what I call functional socialism, “central directive and regulation socialism”. Ronald Reagan called it “control and regulations socialism”. Sweden also a were near perfect example of the corporatist (fascist) state economics, the running of the country by the state in cooperation with labor unions and confederations of employers.  (By fascist economic policies I don’t mean its pejorative meaning but its text book meaning.)

Sweden and Switzerland had after WWII an identical starting point, a workforce that was intact, no devastation of factories and great natural resources and industries. (From the War to the Swedish Model)

Switzerland’s median income earner PPP per capita is today is USD 27.228 and Sweden’s is 19.895 i.e. the cost of the functional socialism Sweden is a reduction of GDP some 30 % over time. Sweden went from pragmatic to ideological functional socialism 1968-1993, it ruined the Swedish economy. Sweden fell in GDP ranking in those years from number 3 to number 17.

Because of Sweden’s corporatist and functional socialist polices the very rich, top 1 % was left intact, income redistribution did not affect them i.e. Sweden has one of the world’s highest wealth GINI factors, measuring wealth inequality, far more wealth inequality than the US.  (Source: Luxembourg Wealth and Income Studies ). On the surface income GINI, income equality, is low in Sweden but it is a false perspective, income mobility is lower to the top 10 % than in the US. To move to the top deciles is very difficult. Studies in Sweden show that admissions to universities from the top 10 % of the income earners s the same as it was in the 1920s, 50 % of the students. (Structural Problems and Reform)

Sweden reversed the disastrous ideological functional socialist policies in the 1990s, drastically cut marginal taxation, abolished wealth and gift tax, privatized social security and sold most state owned utilities as well as banks and railroads. Massive deregulation took place and school vouchers were introduced. Unfortunately Sweden still suffers from the excesses and the expansion of the sclerotic welfare state. It’s impossible to shrink the public sector, government subsidies dependence and the extreme taxation it demands. Public spending as well as taxation is close to 50 % of GDP and seems to be set to stay at 45 %. (Sweden Today)

A median Swedish income earner pays 60 % of his income in taxes and Social Security fees. As a result of having to tax even low income earners, among other things a VAT of 25 %, Sweden has one of the world’s most regressive taxation systems whilst for instance the US has one of the most progressive taxation systems (Prasad et al). Sweden can be seen as an example of the “Road to Serfdom” Hayek warned us about, the point of no return.

So what road should the US take? Sweden or Switzerland?

US the Sweden of the 1970s? A rematch between responsible liberalism vs social democracy

In the US we are now seeing the debate that Sweden had in the 1970’s. Should you have a Big Government, statist state or should you keep the system as it is but put into place legislative frameworks for the citizens to make their own choices within these frameworks or should you take away choice altogether because a small minority cannot make rational choices?

I am extremely disturbed that the US seems to be going the way of Sweden in the1970’s. It led to disaster from a point of economic power and prosperity but also for individual liberty. In Sweden there used to be a saying that Sweden have a capitalist economic system for corporations but have socialized the individual. It was before 1990 a near perfect corporatist state.

Up until 1968 the political opposition in Sweden, mainly Folkpartiet, the Responsible Liberal Party, had been in fierce opposition to socializing polices. However the SocialDemocrats changed tactics and abandoned pure socialism to what Nobel Laureate and party leader Bertil Ohlin called “central directive and regulation socialism”.

During the student and worker uprising of  1968, intellectuals became infatuated with Maoism,  all parties en Sweden became radicalized and the opposition against socializing policies and corporatism stopped. Sweden’s decline started, taxes were raised by 50 % overnight and the Public Sector tripled in size.

Sweden was in 1970 the world’s third strongest economy and declined to the 17th, our welfare system could not be sustained because of lower growth the lead to lower tax revenues than calculated. Entrepreneurs and venture capital had been run out of the country because of the extreme, punitive tax system and the constant attention of the Swedish Tax Authorities. In fact tax evasion and avoidance had become a national pastime for all and the Shadow Economy sector prospered.

By the 90’s and small and medium sized business owners had all but been eradicated, as result Sweden still has least small and medium sized business owners in all of the developed countries (OECD). Not only that in Sweden because of the corporatist polices of strong interaction between labor and  large corporations and government not one single new job has been created in the Private Sector, all new jobs were created in the Public Sector.

So should the US steer the course that Sweden did 1970-1992 semi-socialized statism, massive intervention  as well as high taxes or should we adopt polices Sweden applied after its banking sectors financial meltdown in 1990-1992 and that lead to the Swedish model being the envy of most US liberals i.e. tax cuts, deregulation and abandoning the corporatist model of cooperation between labor and large corporations ?

From Bertil Ohlin’s Memoirs “Socialistisk skordetid kom bort”(“The Socialists crop was never harvested”) 1940-1951 Bonniers 1975.

Bertil Ohlin was not only a party leader but also a professor of Economics as well as Nobel Laureate. He won the prize for the Heckscher-Ohlin theorem.. He was the founder of The Stockholm School of Economics a forerunner to Keynes.

In particular, responsible liberalism saw it as a danger to the liberty of its citizens the development of the growth of an increasingly centralized political power. The SocialDemocrats [Swedish Big Government statists,] were always adherents of such practices that increased the political influence. 

Only when a very strong case could be presented could we in Folkpartiet [Swedish Responsible liberal party] agree to such measures. We preferred makings laws that put a framework in place and with full freedom within this
framework. The SocialDemocrats always wanted to increase what they called “the Societies influence” and minimized the individual’s right to self-determination both in private as well as in business life. Instead of the old “nationalization policy, pure socialism” we now saw on the horizon the beginnings of a new “central directive and regulation socialism” [In the US called Statism] emerging which, however – it must be stressed – was strongly opposed by us and the other parties in opposition and only developed very slowly after1948.

Macroeconometrics: The Science of Hubris

Harsh words from Arnold Kling from Mercatus Center at George Mason University on Macroenomometrics.

Applying macroeconometric models to questions of fiscal policy is the equivalent of using pre-Copernican astronomy to launch a satellite.

[Macroenomometrics] give policy makers the illusion of precise control over the economy, based on methods that are no more reliable than soothsaying or entrail-reading.

 

“Macroeconometrics: The Science of Hubris” by  Arnold Kling at Mercatus Center, George Mason University published  in Critical Review, Volume 23 (1-2).
A shorter version ”The Soothsayers of Macroeconometrics”

”Applying macroeconometric models to questions of fiscal policy is the equivalent of using pre-Copernican astronomy to launch a satellite.

….

In 1976, Robert Lucas suggested that economic behavior could respond to policy changes in ways that would cause macroeconometric models to make systematic errors. Lucas was awarded a Nobel in 1995. It has since become standard in economic research that empirical work must be able to meet “the Lucas critique.” Because traditional macroeconometric models fail to do so, they have disappeared from peer-reviewed journals in economics

….

In the case of fiscal policy, I think that there is a better alternative than to pretend that macroeconometric models work. Instead, economists must be more forthcoming about what they can and cannot estimate. For example, the Congressional Budget Office can reasonably estimate the effect of economic and policy scenarios on components of the government’s budget, including taxes and spending. However, it cannot reasonably estimate the effect of tax and spending changes on the overall economy. The CBO adds value to policy makers by “scoring” the impact of policies on the budget. However, the “scoring” of policies in terms of GDP growth or jobs saved is of no value. The CBO should simply refuse to do it, and the consulting firms that purport to provide such estimates should be regarded as the charlatans they are.

Until the press, the public, and policy makers understand the utter unreliability of macroeconometric estimates of the impact of policies on employment and growth, the answers provided by the usual suspects are worse than nothing. They give policy makers the illusion of precise control over the economy, based on methods that are no more reliable than soothsaying or entrail-reading.”

There is no difference between men and women in risk taking, altruism, fairness concern or trust

Anne Sibert discusses as one of the causes is the impact of the banking crises as a result of gender inequality i.e. too much testosterone leading to risky behavior.

I am so sorry to have to tell her that that hypothesis ha now been proven wrong. A study done by Stockholm School of Economics and a leading the research hospital Karolinska.

Sex hormones do not affect economic behavior

4/7/2009
A new study published in the April 6 advanced online issue of the Proceedings of the National Academy of Sciences (PNAS), shows that neither testosterone nor estrogen had any effect on financial risk taking.

Neither had it no effect on other “economic behavior” (altruism, fairness concerns or trust).

It is well established that women are more reluctant to take financial risks than men are; women for instance are less prone to invest their retirement savings in the stock market. It has been argued that these differences are due to sex hormones. Particularly, testosterone has been thought to increase risk taking and estrogen has been thought to decrease risk taking.

To test the hypothesis that sex hormones affect economic behavior a team of researchers at the Stockholm School of Economics and Karolinska Institutet conducted a double-blind randomised clinical trial. In the study women in the ages 50-65 years were randomly allocated to treatment with, testosterone, estrogen, or placebo. After 4 weeks of treatment, the women participated in a series of economic experiments to measure financial risk taking, altruism, fairness concerns, and trust. But no difference in behavior between the groups was discovered.

Thanks to Freakonomics

“Those that manage their credit well will in some degree subsidize those that have credit problems"

The hard paternalist do not deny themselves. As soon as a small minority fails to manage their lives, the imprudent; regardless of it is about sex, alcohol, drugs, dropping out of schools it is those that can handle their lives, the prudent get hit. It seems that the 90/10 rule is universal.

The hard paternalist legislator refuses to address the issue at source i.e. address the issue of lack of skills and adequate behavior. They instead punish the hard working and prudent by tougher rules and restrictions making life more difficult and more expensive. Not only that the bill for these further restrictions as well as the bill for bailing out the imprudent is burdening the prudent and the careful.

in a just society the bill for these costs in form of higher taxes, higher interest rates, higher fees and more restrictions should fall more havely on those causing it. In a paternalist society the prudent get hit, time after time.

Från NY Times: Overhaul Likely for Credit Cards

Banks are expected to look at reviving annual fees,
curtailing cash-back and other rewards programs and charging interest
immediately on a purchase instead of allowing a grace period of weeks,
according to bank officials and trade groups.

“It will be a different business,” said Edward L. Yingling, the
chief executive of the American Bankers Association, which has been
lobbying Congress for more lenient legislation on behalf of the
nation’s biggest banks. “Those that manage their credit well will in some degree subsidize those that have credit problems.” [min kursiv]

 Thanksto

Sustainable Energy without Hot Air

I am an incurable techo-optimist I have always held that most of humanities problems can be fixed with an application of scientific knowledge och scientific methods. I have even thought that the issue of global warming could be solved with the application of more efficient solar panels as well as with the development of fusion energy. Tim Harford apparently had the same thoughts but after reading, download it,  Sustainable Energy – Without the Hot Air, by Professor MacKay. Tim Harford writes in his blog post Switch to renewable energy? If only it were that simple:

Professor MacKay makes this point very simply by sidestepping the
economics altogether. Technological progress and economic growth loosen
the corset of cost-benefit analysis, but not the laws of physics. No
matter how cheap and efficient solar collectors become, there is only
so much solar power available per square metre of land. Hydroelectric
energy is constrained by the quantity of rainfall and the height of
reservoirs above sea level. The most perfectly designed windmill is
limited by the energy of the wind. It would barely be possible to make
the numbers add up even if renewable energy generators were free
.